EC102_-_Ch_8_Saving_and_Investment_Quest - Answers

EC102_-_Ch_8_Saving_and_Investment_Quest - Answers -...

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2f80b98297c0e63d5108438aa6f0a886cc670e59.doc 1 1. Susan puts $125 into an account and one year later has $135; what was the interest rate? Recall formula for Future Value –  FV(j)  = PV(1 + R)j $135 = $125(1 + R) 1 $135/$125 = (1 + R) 1.08 = 1 + R 1.08 – 1 = R R = 0.08 Therefore, the real interest rate is 8% 2. What is the present value of a payment of $150 one year from today if the interest rate is 6  percent? Recall formula for present value:  PV = FV (j)/ (1 + R) j = $150/ (1 + 0.06) 1 = $141.51 Calculate the future value for of each of the following in Table 1.  (Interest rate is an annual interest rate) Table 1 Present Value Interest Rate Term Future Value $100  0.02 1 $102.00 $125  0.03 2 $132.61 $150  0.04 3 $168.73 $175  0.05 4 $212.71 $200  0.06 5 $267.65 $225  0.07 6 $337.66 $250  0.08 7 $428.46 $275  0.09 8 $547.95 $300  0.10 9 $707.38
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2f80b98297c0e63d5108438aa6f0a886cc670e59.doc 2 $325  0.11 10 $922.81 $350  0.12 11 $1,217.49 4.  Calculate the present value of each of the following in Table 2.  Note, the relation between  the length of the term and the present value. Table 2 Future  Value Interest  Rate Term Present Value $1,000  0.075 1 $930.23  $1,000  0.075 2 $865.33  $1,000  0.075 3 $804.96  $1,000  0.075 4 $748.80  $1,000  0.075 5 $696.56  The present value is lower, the longer the term of the investment. 5.
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EC102_-_Ch_8_Saving_and_Investment_Quest - Answers -...

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